BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just Β£1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!
 |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] | |
England and Wales High Court (Commercial Court) Decisions |
||
|
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> CGU International Insurance Plc & Ors v Astrazeneca Insurance Company Ltd [2005] EWHC 2755 (Comm) (01 December 2005) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2005/2755.html Cite as: [2006] Lloyd's Rep IR 409, [2005] EWHC 2755, [2005] EWHC 2755 (Comm), [2006] Lloyds Rep IR 409, [2006] 1 CLC 162 |
||
[New search] [Printable RTF version] [Help]
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
||
B e f o r e :
____________________
| (1) CGU INTERNATIONAL INSURANCE PLC (2) ROYAL & SUN ALLIANCE INSURANCE PLC (3) GERLING GENERAL INSURANCE COMPANY (UK BRANCH) (4) ZURICH INTERNATIONAL INSURANCE (UK) LIMITED (5) XL INSURANCE COMPANY LIMITED (6) AXA CORPORATE SOLUTIONS SERVICES UK LIMITED |
Claimants |
|
| - and - |
||
| ASTRAZENECA INSURANCE COMPANY LIMITED |
Defendant |
____________________
Alistair Schaff QC and David Edwards (instructed by Mayer, Brown, Rowe and Maw LLP) for the Defendant
Hearing dates:
____________________
Crown Copyright ©
Mr. Justice Cresswell :
The appeal
(1) By reference to which substantive law is AZICL's liability to Garst to be determined?
(2) By reference to which substantive law is the Reinsurers' liability to AZICL under the Reinsurance Contract to be determined?
(3) In relation to the latter, what is the effect of the "follow the fortunes" provision in Article 12?
Introduction
The Background to the Underlying Insurance and the Reinsurance
"Zeneca is seeking to restructure its key insurance programmes of property damage/business interruption and general liability this year (1997). The most significant change is the proposal to put these covers onto a three-year, combined aggregate basis."
Below they said:
"The additional benefits of this approach are to:
1. enhance the consistency of coverage, particularly in the liability programme . . .
2. establish long-term contractual relationships with a number of important insurance markets who we believe not only provide the level of security requisite for a company of Z's stature but also will be in tune with the Group's risk management philosophy
3. through the establishment of partnerships, promote enhanced working relationships that go beyond the normal round of annual renewal negotiations
4. put in place an insurance programme that more effectively matches Z's risk profile."
"Section 1: Material Damage and Business Interruption, and
Section 2: General Liability
All as defined in the respective master and underlying Local Policies, and for 100% of that proportion of the liability imported into the Zeneca worldwide programmes as agreed between the Reinsured and the leading Reinsurer."
The territorial scope was "Worldwide."
"The Reinsurer agrees to follow in all respects the fortunes of the Reinsured. Reinsurers hereunder will, however, have the right to and shall be given the opportunity to associate with the Reinsured in the defence and control of any claim, suit or proceedings relative to any loss where the claim or suit involves or appears relatively likely to involve Reinsurers hereunder."
This right is then limited to CGU and RSA as leading underwriters.
The policies reinsured included an Excess Liability Policy.
The Excess Liability Policy
"It is agreed that this Policy is composite in nature by which is meant that all entities designated as insureds hereunder are each insured severally in respect of their separate interests."
As respects Garst, the effect of this provision was to cause the separate interests of Garst to be insured severally from those of other AstraZeneca subsidiaries.
"USA SERVICE OF SUIT
As respects Insureds operating in the United States of America, its territories or possessions, the Company agrees that:
In the event of the failure of the Company to pay any amount claimed to be due hereunder, the Company, at the request of the Insured, will submit to the jurisdiction of a Court of competent jurisdiction within the United States. Nothing in this Clause constitutes or should be understood to constitute a waiver of the Company's right to commence an action in any Court of competent Jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another Court as permitted by the laws of the United States or of any state in the United States.
Service of process in such suit may be made upon the person(s) or firm named in item 10 of the Declarations [Messrs Mendes & Mount of New York City] and that in any suit instituted against them upon this Policy, the Company will abide by the final decision of such Court or of any appellate Court in the event of an appeal."
The Reinsurance Policy
"Article 1
BUSINESS COVERED
Under the terms of Article 2 the REINSURER agrees to reimburse the REINSURED on an excess of loss and excess of aggregate basis. This Agreement to reimburse the REINSURED is limited to the REINSURED's participation on the interest hereunder, being [there was then a reference to the Excess Liability Policy] all as defined in the original policies and for 100% of that proportion of the liability imported into the world-wide programme of Zeneca Group Plc . . .
Article 2
CESSION
The REINSURED shall reinsure by way of Quota Share Excess of Loss and Excess of Aggregate Reinsurance 100% of the business specified in Article 1 . . .
Article 7
LIABILITY OF THE REINSURER
The liability of the REINSURER shall commence and expire simultaneously with that of the REINSURED. The CESSIONS hereunder are subject to all the conditions of the original policies or any amendments thereto . . .".
Article 9 contained the details of the Reinsured's net retention.
"ASSISTANCE AND CO-OPERATION
(a) The REINSURER agrees to follow in all respects the fortunes of the REINSURER.
(b) The REINSURER will, however, have the right and shall be given the opportunity to associate with the REINSURED in the defence and control of any claim, suit or proceedings relative to any loss where a claim or suit involves or appears likely to involve the REINSURER . . .".
Article 19 provided that the Reinsurance should be interpreted and governed by the laws of England, and Article 20 provided for disputes to be resolved by Arbitration in London.
Factual Background to the Claim
The Arbitral Proceedings
The Preliminary Issue
AZICL's Case
AZICL's case before the Tribunal was as follows.
Reinsurers' Case
The Tribunal's unanimous holding
(1) Absent settlement of its claim, Garst would have exercised its right under the US service-of-suit clause in the underlying ELP, and would have commenced proceedings in Iowa, where it had its headquarters and principal place of business.
(2) There would have been a right for AZICL to have applied to have the case transferred to a US District Court or another US State Court of competent jurisdiction, but the Tribunal doubted whether that right would have been exercised.
(3) The possibility of an Iowa Court choosing to apply English law in the circumstances of this case to a hypothetical coverage dispute between Garst and AZICL was remote in the extreme.
(4) If the Iowa Court had concluded that the issue between the parties ought, in accordance with Iowa conflicts rules, to be determined by reference to Iowa law, it was inconceivable that it would nonetheless have stayed the Iowa proceedings in favour of proceedings in England.
Common ground
The Tribunal recorded the following.
The majority holding
The majority of the Tribunal held as follows.
(1) Their task as arbitrators was to ascertain the common intention of the parties to the ELP and to give effect to that intent. The common intention of the parties was to be ascertained by reference to the contractual documentation and the surrounding circumstances.
(2) The primary concern of both the insured, Garst, and its insurer, AZICL, was liability that might arise from Garst's activities in the US. Towards this end, it was agreed that the ELP was to be considered a "separate policy" (Condition J) which "insured severally" Garst's "separate interests" (Condition D). In the event of the insurer's failure to pay a claim made by the insured, the Policy required AZICL to submit to the jurisdiction of any US court of competent jurisdiction. Under these circumstances the parties to the ELP contemplated at the time the contract was made that the extent of the coverage afforded to Garst under the Policy would be determined according to US law.
(3) It was not the presumed intention of the parties that the ELP would be subject to the laws of Iowa from its inception.
(4) AZICL and Garst properly could, and did, provide at the time of creating the Policy that questions regarding the extent of policy coverage for a US insured would be determined by US law.
(5) They were looking not at what the parties intended to be the proper law as to the whole of the ELP (conceded to be the law of England) but at only what law the parties contemplated should apply in respect of the insurer having failed to pay a claim made by a US insured under the Policy.
(6) The policy wordings and commercial circumstances left the majority in no doubt that the parties intended US law to apply to that part of the Policy under review.
(7) The common intention of the parties to the reinsurance agreement must again be ascertained by reference to the contractual documentation between them as understood, if necessary, by the surrounding circumstances.
(8) The decision of the House of Lords in Vesta v Butcher embodies the principles exactly in point in the present case, i.e. where the terms and conditions of the underlying policy are incorporated into the reinsurance agreement, then the wording of the policy which determines the extent of the insurer's obligation to the insured, must be construed to have the same meaning in the reinsurance agreement in the absence of any express declaration in the reinsurance agreement to the contrary.
(9) It was open to the Reinsurers to have insisted on inclusion of a separate clause in the ELP requiring that the validity of a claim asserted in a US jurisdiction could be determined only under English law.
(10) The intent of the underlying coverage was also evident to the Reinsurers in the very nature of the reinsurance transaction. Reinsurers providing 100-percent reinsurance of a captive reinsured have need to be significantly more involved in the terms of the underlying coverage than is the case in traditional quota share reinsurance.
(11) Reinsurers' business experience and common sense should have made them appreciate that claims by a US insured, such as Garst, would be determined in accordance with US law.
(12) The evidence overwhelmingly points to an intent of the parties at the time the Reinsurance Agreement was made that AZICL's US liabilities under the terms of the ELP would be matched by liability of the Reinsurers. That was the cover sought by the Reinsured and the cover agreed to be provided by the Reinsurers.
(13) The Reinsurers agreed in Article 12 "to follow in all respects the fortunes" of the reinsured. Such a provision makes little sense if the Reinsurers can avoid liability under English law where the Reinsured is expressly subject to policy liability under the law of a US jurisdiction.
(14) The parties to the Reinsurance Agreement were aware and contemplated at the time of making the Agreement that where a claim was brought in the States by an insured who was entitled, and likely, to invoke the Service of Suit clause (with the result that the claim would be determined by the law of the US jurisdiction where the claim was brought) the claim so determined or otherwise properly settled would be passed down the reinsurance chain to Reinsurers.
(15) In accordance with the clear intention of the parties at the time the contract was made, Iowa law is to be applied to the question of whether or not there was a loss under the terms and conditions of the ELP. That intent was incorporated by the parties to the Reinsurance Agreement.
(16) For the above reasons the law to be applied to the issue of whether or not there was a loss under the underlying ELP, and for the purposes of establishing consequent liability on the part of the Reinsurers to indemnify AZICL under the Reinsurance Policy, is the law of the State of Iowa.
Mr Rokison QC's dissenting opinion
1. By reference to which substantive law is AZICL's liability to Garst to be determined?
2. By reference to which substantive law is the Reinsurers' liability to AZICL under the Reinsurance Contract to be determined?
3. In relation to the latter, what is the effect of the "follow the fortunes" provision in Article 12?
(1) Even if, in accordance with Condition D and Condition J of the underlying ELP, the contract between AZICL and Garst were to be regarded as a separate policy, with Garst's interests separately insured, the option given to Garst under the USA Service of Suit clause not having been exercised, this gives no indication that it was the presumed intention of the parties to that contract that it should be subject to the laws of Iowa from its inception.
(2) It was common ground between the parties to this arbitration that in accordance with English conflicts of laws principles, which an English tribunal is prima facie required to apply, the underlying ELP should properly be regarded as governed by English law. The fact that Garst would have brought proceedings against AZICL in Iowa and that an Iowa Court would have determined AZICL's liability under the ELP by reference to Iowa law is not sufficient ground to conclude that the question of AZICL's liability to Garst should be determined by Iowa law.
(3) The majority make it clear that they do not seek to go behind the concession that the "original" proper law of the ELP was that of England. Their decision seems to be based either on the ground that in circumstances where the relevant insured was a US corporation, part of the Policy was to be governed by Iowa Law (or US Law), or that, in these circumstances, at some point in time the governing law was to change.
(4) If the former is the rationale, then that runs contrary to the concession; if the latter, the question arises at what time does the law change in a case where the relevant insured has not even invoked the USA Service of Suit clause? Is a threat to sue in Iowa sufficient? If so, it would appear that the Insurers could be properly advised, by an English lawyer, on one day that he was not liable, but that, if the relevant insured threatened proceedings in Iowa the following day, he would or may become liable. Such a conclusion is impracticable, to say the least. It cannot reflect the presumed intention of the parties.
(5) In order to recover under a reinsurance contract, the reinsured must establish not only that he was liable to the original insured under the terms of the underlying insurance contract, but also that he is entitled to recover under the terms of the reinsurance contract.
(6) Even if it were right, in accordance with the conclusion of the majority, that, for the purposes of determining that there was a loss under the underlying policy, the Tribunal should look at the law which would have been applied by the Iowa Court had Garst's claim not been settled, but had been litigated against AZICL in Iowa, the question remains - which law should be applied in order to determine whether or not Reinsurers are liable under the Reinsurance Policy in respect of such loss?
(7) Even if one were to conclude that there was a loss under the underlying policy, because AZICL would have been held liable by an Iowa Court applying Iowa law, the English authorities make it clear that this is not enough, and that it is always open to the reinsurers to take the point that they are not liable to indemnify the reinsured because the loss is not within the terms of the reinsurance.
(8) In this case, the Tribunal is not concerned with construing or applying any purported limitation on the Reinsurers' liability. The issue concerns the scope of the risk, and in particular the meaning to be attributed to the phrase "Property Damage" which would, apparently, be wider under Iowa law than under English law.
(9) It is perhaps dangerous to seek to ascertain the intention of the parties by reference to assumptions as to their subjective beliefs or understandings at the time the contract was made. The task of a tribunal is to ascertain and apply the parties' presumed intentions from the terms of their contract properly construed albeit in the context of the commercial background.
(10) AZICL was not an "arm's length" insurer of Garst and the other AstraZeneca companies, but was the group "captive". AZICL did not have any retention, but reinsured 100% of its risk. The real commercial bargain was to be found in the Reinsurance under which Reinsurers, a number of leading companies in the London market, effectively insured AstraZeneca (an English corporation with worldwide subsidiaries) through its English captive in London for a negotiated premium under a contract expressly made subject to English law.
(11) It was not suggested that the Reinsurance contract was "severable" in the sense that Reinsurers should be regarded as having reinsured AZICL separately in relation to each and every AstraZeneca company. To conclude that Reinsurers' liability to AZICL under the Reinsurance in relation to such matters as the scope of cover and in particular what constituted "Property Damage" would vary, depending on (i) the identity of the insured AstraZeneca company making the original claim, (ii) the court in which such claim would have been pursued if not settled, (iii) the law which that court would have applied, and (iv) how the term "Property Damage" would have been construed in accordance with that law, would not be "back to back" so much as "back to front".
(12) Even if (contrary to the above) for the purposes of considering Reinsurers' liability under the Reinsurance, AZICL's liability to Garst should properly be determined by reference to Iowa law, nevertheless Reinsurers should only be held liable under the Reinsurance to the extent to which the loss in respect of which AZICL had indemnified Garst and for which it sought indemnity against Reinsurers, arose from "Property Damage" as properly construed under English law, being the express governing law of the Reinsurance contract, both under Article 19: "This agreement shall be interpreted as governed by the laws of England", and under Article 20, the Arbitration Clause: "The seat of the arbitration shall be in London and the arbitral tribunal shall apply the laws of England as the proper law of this agreement."
(13) The first and second question should be answered English law.
(14) AZICL did not contend that, if it failed on its principal argument based on the notional application of Iowa law by an Iowa court, the "follow the fortunes" clause would have been sufficient, on its own, to establish liability in this case. In particular, AZICL did not suggest that it had the same effect as a "follow the settlements" clause, the incorporation of which in the case of the reinsurance of a "captive" insurer of the original insured would (as the majority decision acknowledges) be surprising.
(15) In these circumstances, it is not necessary for the Tribunal to attempt to define the scope and effect of the "follow the fortunes" clause. In its context, in an article dealing with "Assistance and Cooperation", and with the qualification in Article 12(b): "The REINSURER will, however, have the right and shall be given the opportunity to associate with the REINSURED in the defence and control of any claim, suit or proceedings relative to any loss where a claim or suit involves or appears likely to involve the REINSURER ", its meaning and effect, if any, would go no further than to provide that the Reinsurer would be bound by any judgment obtained by the original insured against the Reinsured but would only be bound by a settlement if and to the extent to which the settlement had been the consequence of its own intervention.. But that would not avail AZICL in the present case. To go further would, in effect, be applying the "follow the fortunes" provision as if it were a "follow the settlements" clause, which it is common ground it is not.
The appeal
Reinsurers' submissions
Mr Christopher Butcher QC for the claimants submitted as follows.
(1) There was no suggestion in King that the Texas conflicts rules were considered relevant at all (with or without evidence of how they differed from English rules).
(2) It is implausible that the Texas conflicts rules did not differ from the English rules: see the Second Restatement rules, set out in paragraph 11.5 of the Reasons of the majority arbitrators.
(3) By the time of the settlement which led to the dispute in King, there had been a judgment of the Texas court on coverage under Part IIIA of the policy in issue in that case, which must have determined what Texas conflicts rules identified as the applicable proper law (English/ New York/ Texas or other). It is inconceivable that one party or other in King would not have relied on that Texas decision in support of their respective cases on applicable law (English law or New York law), had either of them considered the Texas conflicts rules to be conceivably relevant.
(1) A reinsurance is an insurance on the same subject-matter as the original insurance (e.g. ship, factory, potential liabilities of AstraZeneca group), issued to an insurer, whose insurable interest in that original subject-matter derives from his potential obligation to indemnify the original insured against the risks covered by the direct insurance.
(2) It is not an insurance of the insurers'/ reinsured's potential liabilities under the direct insurance.
(3) A reinsurance is, nevertheless, a contract of indemnity: so, in order to make good a claim on the reinsurance, the insurer/ reinsured must show a loss or damage to his insured interest in the original subject-matter, suffered by him by reason of his undertaking to indemnify the original insured against the insured risks. The reinsured's loss will be measured by his actual and ascertained obligation to indemnify the original insured, because this shows the extent of the damnification of his insurable interest. But his liability to the original insured is not what is insured: it is the original subject-matter which is (re)insured on the terms of the direct insurance.
See Delver v Barnes (1807) 1 Taunt 48, British Dominions v Duder [1915] 2 KB 394 at 400 (Buckley LJ), Forsikringsaktieselskabet of Copenhagen v. Attorney General (1924) 19 Ll. L.R 32 at 34 (Scrutton LJ), 35 (Atkin LJ); [1925] AC 639 at 642 (Lord Cave); Toomey v Eagle Star Insurance Company Limited [1994] 1 Lloyd's Rep. 516 at 522rhc-524lhc (Hobhouse LJ); Charter Re v Fagan [1997] AC 313 at p. 392E (Lord Hoffmann).
(1) There was (it is to be assumed) no or limited cover for Garst under the terms of the ELP; and
(2) Any such loss as has been suffered by AZICL is not within the scope of the cover given by the Reinsurance, given that Garst's liability was not within the cover given by the ELP, nor within the terms of the Reinsurance (which incorporated the terms of the ELP)
when those contracts are interpreted in accordance with their respective proper laws (both English law).
AZICL's submissions
Mr Alistair Schaff QC for AZICL submitted as follows.
i) if the claim for indemnity by Garst against AZICL had not been settled, Garst would have (imminently) invoked the US Service of Suit clause and sued AZICL in Iowa;
ii) the Iowa Court, properly applying its own conflict of laws rules in accordance with the Restatement, would have determined that the governing law of the ELP as between Garst and AZICL was Iowa law and would have accordingly applied Iowa law to determine the scope of coverage afforded to Garst under the ELP.
"(1) By reference to which substantive law is AZICL's liability to Garst to be determined?
(2) By reference to which substantive law is the Reinsurers' liability to AZICL under the Reinsurance contract to be determined?"
provided that it is understood that (i) both questions were directed towards identifying whether Iowa law had any substantive legal relevance, not merely an English conflict of law relevance, to AZICL's claim for indemnity; and (ii) the first question was concerned with the substantive law applicable to determining AZICL's liability to Garst under the ELP, not in the abstract, but in the context of assessing the validity of AZICL's claim under the Reinsurance.
i) Question 1 is concerned with the first limb of Lord Mustill's first rule in Hill v Mercantile ("loss falling within the cover of the policy reinsured [the ELP]") what does it mean in the present context and what does AZICL, as reassured, have to prove in order to establish that it has suffered an insured loss for the purposes of its claim under the Reinsurance?
ii) Question 2 is concerned with the second limb of Lord Mustill's first rule in Hill v Mercantile ("losses falling within the cover created by the reinsurance [the Reinsurance]") what does it mean in the present context and what is the meaning and effect of Articles 1,2,7 and 12 of the Reinsurance?
i) AZICL was insuring under the ELP the liabilities of AstraZeneca plc and its various associated companies world-wide.
ii) Specifically in relation to associated companies operating in the USA (representing in the order of 45% of the group turnover), AZICL was doing so on terms which permitted those companies to sue AZICL in the US and which required AZICL to abide by the decision of a competent US court.
The first question
i) whether the loss falls within the subject-matter insured under the ELP; and
ii) whether AZICL has suffered a (necessarily ascertained) loss arising out of the damnification of its insurable interest under the ELP,
it is difficult to see how there can be damnification of its insurable interest under the ELP, without there being a loss falling within the subject-matter insured under the ELP. Moreover, how can the two questions be determined by a different applicable law?
It is for precisely that reason that the language of 'liability' is frequently found in statements of principle of the highest authority.
The reason why the distinction between 'original subject matter' and liability insurance is drawn is for a completely different reason, namely to ensure that an honest and conscientious (but mistaken) belief by the insurer that a claim falls within the policy does not transfer into the reinsurance, risks beyond those which the insurer and thus the reinsurer have accepted: Hill v Mercantile at 1253. Mere payment in respect of a potential (but not actual) liability is not enough: Charter Re at 385, 387, 392. The decision in Toomey is consistent with that explanation.
"It is well settled that (subject to any provision to the contrary in the reinsurance policy) the reassured, in order to recover from their underwriters, must prove the loss in the same manner as the original assured must have proved it against them, and the reinsurers can raise all defences which were open to the reassured against the original assured."
"the reinsurer when sued by the underwriter had precisely the same defences as the underwriter had in an action against him by the original assured" and "all defences that the [insurer] could have raised in an action by the assured are open to the [reinsurer]."
i) The P.O. Lawrence J analysis would suggest the correct answer is as AZICL contends.
ii) AZICL's analysis gives effect to, rather than undermines, the commercial expectations of the parties that there should be back to back coverage.
iii) Reinsurers' analysis gives rise to the real difficulty of what effect a foreign judgment has. The logic of Reinsurers' position is that a foreign judgment applying Iowa law would not only not be determinative of the outcome in England, between AZICL and Reinsurers, but it would be utterly irrelevant. If an exclusively Iowa law liability of AZICL under the ELP is to be treated as falling outside the scope of the ELP, an Iowa judgment cannot make it fall within the scope of the ELP.
iv) Any such distinction between the effect of a foreign judgment and the effect of a settlement of a foreign claim gives rise to major difficulties of mitigation of loss (See the Reasons of the majority arbitrators at paragraph 12.44). It would be unlikely that an insurer could ever safely settle a foreign claim.
The second question
i) The majority, applying their commercial experience to a clause which, as Saville J said in Hayter v Nelson [1990] 2 Lloyd's Rep. 265, was a matter for market rather than judicial construction, considered that the clause made little sense if Reinsurers could avoid liability under English law.
ii) Even the dissent acknowledged that this clause might bind Reinsurers to follow an Iowa judgment. If it binds them to follow an Iowa judgment, why is Iowa law irrelevant if the case is (reasonably) settled prior to judgment?
ANALYSIS AND CONCLUSIONS
The reasons why the parties agreed that the question of applicable law should be determined by the Tribunal as a preliminary issue
"At an early stage, it became apparent that there was a potentially very significant issue which divided AZICL and Reinsurers as to whether any liability of Garst to the various third party claimants was a liability for "damages on account of Property Damage" within the meaning of the ELP.
In that context, it became apparent that there was likely to be a very significant difference between substantive Iowa law (or US law) and English law, English law taking a narrower view of what constitutes "damages on account of Property Damage" than Iowa law for these purposes.
Accordingly, the assumption which underpinned the determination of a preliminary issue in this case was that there is such a difference, and that if AZICL is right as to the legal relevance of Iowa law, it will be entitled to recover the US$80 million which it has paid to Garst from Reinsurers, or at least a substantially greater proportion thereof than that which has been acknowledged by Reinsurers as due on a proper application of English law to the same question."
"The issue concerns the scope of the risk, and in particular the meaning to be attributed to the phrase "Property Damage" which would, apparently, be wider under Iowa law than under English law. "
Some General Principles
It is convenient at this point in the judgment to set out the following general principles of law.
Reinsurance is the insurance of an insurable interest in the subject matter of an original insurance and the principles of subrogation apply. (Toomey supra at 523).
Some particular features of this case
(1) The concessions made by AZICL before the Tribunal (see below);
(2) No proceedings were commenced by Garst in Iowa (or anywhere else);
(3) The ELP did not contain a follow settlements clause;
(4) This is not a case where the ELP and the Reinsurance Contract had different governing laws;
(5) This is not a case where the Service of Suit clause in the ELP made any express provision as to the law to be applied in the event of a suit taking place in the United States.
The number of entities insured under the ELP and the number of countries in which they operate
Concessions made by AZICL before the Tribunal
i) applying English conflict rules (which the Tribunal had to apply) the proper/governing law of the ELP "was, is and always will be" English law. (Transcript Day 3, page 11).
ii) the Service of Suit clause did not affect the proper law of the contract (applying English conflict rules). (Transcript Day 3, page 11).
iii) " each insured has a separate insurance policy. Under English conflict of law rules it does not matter that it is a separate insurance policy the whole bundle of policies is governed by English law because English law would not strip them out". (Transcript Day 3, page 188).
[In footnote 36 to his skeleton argument Mr Schaff said "English law, binding short of the House of Lords, regards as anathema the idea that [a] group policy such as that obtained by AstraZeneca plc could be "scissored up" so as to be impliedly governed by different applicable laws with regard to different co-assureds: see, for example, American Motorists v Cellstar. US law is much more susceptible to the idea that in a composite group policy, the notionally separate policies issued to each co-assured may be governed by a different applicable law: Reasons paragraphs 11.3 and 11.4"].
"I have no doubt that the present composite policy would fall to be regarded as a single, probably multi-partite, contract. Neither the parties nor the Rome Convention could sensibly be taken to have intended to scissor up the policy negotiated and issued in Houston and to subject different aspects of it to different governing laws. The potential problems arising on such an approach do not need emphasis. I will only instance the problems that would arise if different countries had different principles or remedies governing non-disclosure or breach of warranty".
"In American Motorists Insurance Co v. Cellstar Corporation paras. 14-43 Mance L.J. reviewed the applicability of these schemes in considerable detail. He decided (para. 21) that the policy in that case was a single, probably multi-partite, contract and that neither the parties nor the Rome Convention could sensibly be taken to have intended to "scissor up" the policy and to subject different aspects of it to different governing laws. For the purpose of applying Schedule 3A, the policy holder in that case was the parent company which took out the policy, with the subsidiary companies being insureds.
In this case the position is the same. The Policy was taken out by Sun Life Canada for itself and its subsidiaries. It is a composite multi-partite policy with a single undivided premium payable. It is inconceivable that the parties intended that the Policy should be "scissored up" so as to provide for a different governing law for different insureds or risks. The risk is a large risk for the purposes of Schedule 3A."
The scope of the Applicable Law
"Rule 178 (1) The law applicable to a contract by virtue of Rules 173 and 174 governs in particular
(a) interpretation;
(b) performance;
(c) within the limits of the powers conferred on the court by its procedural law, the consequences of breach, including the assessment of damages in so far as it is governed by rules of law;
(d) the various ways of extinguishing obligations, and prescription and limitation of actions.
(2) In relation to the manner of performance and the steps to be taken in the event of defective performance regard is to be had to the law of the country in which performance takes place. "
"32-188
Interpretation. That a contract must be construed in accordance with its governing law is almost self-evident. The aim of the court, when called upon to interpret a contract, is to discover the intention of the parties. Accordingly, the governing law determines what terms or trade usages are to be implied into the contract and what meaning is to be attributed to technical, legal or commercial terms.
32-189
Where an expression is ambiguous, which of the possible meanings was intended by the parties is ascertained in accordance with the canons of construction which form part of the governing law. If the governing law ascribes a particular meaning to particular words, the parties are bound by that meaning. The governing law will have to decide how far trade usages must be deemed to be incorporated in the contract for the purposes of its construction, how far words used in a contract must be interpreted in the light of negotiations which preceded or accompanied or followed the conclusion of the contract, how far the correspondence between the parties may be used in order to ascertain the meaning they attached to the words used in the instrument, etc."
"A problem of considerable practical significance may arise in a situation where the original insurance contract and the reinsurance contract have, or are held to have, different governing laws. The reinsurance contract may provide that cover is to be provided on the same terms and conditions as those of the original contract of insurance so that clear commercial purpose is to provide cover corresponding to that contained in the original contract. Difficulty arises, however, if such a result is not provided for under the relevant governing laws, as, for example, where the law governing the original insurance would not regard a breach of warranty as rendering the contract null and void but the law applicable to the reinsurance would regard the breach of warranty as having this effect. In Forsikringsaktieselskapet Vesta v Butcher [1989] AC 852 the original insurance policy was governed by Norwegian law according to which the breach of warranty which had occurred did not render the policy null and void because the breach did not contribute to the loss suffered by the insured. According to English law, which governed the reinsurance policy, the breach of warranty, whether relevant to the loss or not, rendered the reinsurance policy null and void. Accordingly, though it was admitted that the original insurers were liable to the insured under the original policy, it was argued that because the reinsurance policy was void the reinsurers were not liable to indemnify the reinsured against the liability it had incurred. The trial judge, Hobhouse J, held that although the reinsurance contract was governed, as a whole, by English law, the relevant clauses giving rise to the alleged breach of warranty were intended by the parties to be governed by Norwegian law. Thus the effects of common clauses in each policy were harmonised. The Court of Appeal and the House of Lords took rather a narrower view, treating the question as involving the construction or interpretation of a reinsurance contract governed by English law. As a matter of the English law of construction, it was necessary to resort to the Norwegian law governing the original insurance so that the same meaning could be given to terms common to the policies. The narrower view supports the proposition that the construction of a reinsurance policy is governed by the law applicable to that policy and that, accordingly, the extent to which harmony can be achieved in the coverage of each policy will be a matter for the rules of construction which prevail in that law."
In the present case the ELP and the Reinsurance Contract have the same governing law. In my opinion the approach adopted in Vesta v Butcher has no application in the present case.
Mr Schaff QC's central submission
I draw attention to the width of Mr Schaff''s central submission which was as follows.
That this might vary according to the location of the US insured and (theoretically) according to the location of non-US insureds (although there was no comparable Service of Suit clause providing for submission to [say] Argentine jurisdiction and for [say] Argentine judgments to be binding) was a necessary corollary of the reinsurance of a worldwide programme, where claims were liable to arise in different jurisdictions under different laws.
(A) Whenever a claim was made against AZICL by an insured
i) in any foreign court of competent jurisdiction;
ii) whose conflict of law rules led to the application of the substantive law of that country or state; and
iii) AZICL was held liable in an action brought in that country or state,
OR
(B) Whenever AZICL reasonably settled a claim which would have been brought against AZICL by an insured
i) in any foreign court of competent jurisdiction;
ii) whose conflict of law rules would have led to the application of the substantive law of that country or state,
in both cases ((A) and (B) above) "insofar as the local law had [been] applied to determine AZICL's liability [or would have been applied but for a reasonable settlement], then Reinsurers would not be entitled to rely on an English law consequence which had a different effect." " Any issue that arose as between the insured and AZICL in the foreign court [or would have arisen between the insured and AZICL in the foreign court but for a reasonable settlement] is to be governed by the law of that court."
I turn to consider the 3 questions of law.
By reference to which substantive law is AZICL's liability to Garst to be determined?
"it was for the judge to form his own view of whether or not an arguable defence had been shown by the reinsurers that the plaintiffs were not liable to Exxon under section 1 of the GCE policy according to the applicable law and rules of construction."
"If the judge is right the case demonstrates the perils of settling under primary insurance when the reinsurance is not subject to a full follow the settlements clause." (Paragraph 1)
and
" can it really be true that the terms of an insurance contract placed in the London market could have a different meaning depending on whether it is being construed by a court in England under English law or a court in New York under New York law? We would not have expected the approach to construction to be so different in the two places and we would have expected that authorities persuasive in one court would also be persuasive in the other. We would expect both to reach the same conclusion about the intentions of the parties to be ascertained from the written document." (Paragraph 34).
(2) By reference to which substantive law is the Reinsurers' liability to AZICL under the Reinsurance Contract to be determined?
(As to the effect of such a clause see para [98] above).
(3) In relation to question (2) above, what is the effect of the "follow the fortunes" provision in Article 12?
Conclusion
